strategy and strategic analysis...
TRANSCRIPT
Strategy and Strategic Analysis
GEST-S-468
Pr Manuel Hensmans
Schedule Remaining Classes
• Class 7: Corporate strategy (08/11)
• Class 8: International Strategy (18/11)
• Class 9: Innovation I (25/11)
• Class 10: Innovation II (29/11)
• Class 11: Methods / Strategy dvpt Processes (02/12)
• Class 12: Q&A exam (06/12)
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Slide 7.3
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 7.3
Strategic Choices
7: Corporate Strategy and
Diversification
This Class: Corporate Strategy
• Different types of corporate diversification – market penetration – product development – market development – conglomerate diversification
• Relation diversification & performance – value-creating drivers – value-destroying drivers – Western versus Emerging Market firms
• Different parenting roles
• Integrate or outsource
• Parenting matrix strategies – How can a parent make investment/divestment decisions?
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Corporate Strategy is...
• Logic for owning more than one business
– Where to compete
• Product & market choices
– Corporate parenting capability
Responsibility of corporate parent
The corporate parent refers to the levels of management above that of the business units, and
therefore without direct interaction with buyers and competitors.
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Corporate Diversification
• Diversification – increase the range of products or markets served by an organisation
• Related diversification – diversify into products or services with relationships to the existing
business.
• Unrelated diversification – diversify into products or services with no relationships to the existing
businesses.
Case
8 |
• Madonna competes in multiple markets • recorded music, concerts, videos, movies, book publishing, mgmt
– What kind of diversification? • Related
– Corporate value creation?
• Madonna’s overarching capabilities in “popular entertainment”
• Spotting emerging trends + gathering team
– Synergies between multiple businesses?
• Superstar status synergies!
– Madonna has highly consistent image across multiple media
» >< Elvis (wild rocker versus clean-cut all-American movie star)
– Superstar!
» Higher status than competitors in individual markets
Diversification types (Ansoff Matrix)
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Did you read case on Virgin?
What is Market Penetration?
Market penetration refers to a strategy by which an organisation takes increased share of its existing
markets with its existing product range.
Virgin case?
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Constraints of Market Penetration
Retaliation from
competitors
Legal constraints
12
Cola Wars
Mutually-targeted TV ads and marketing campaigns
since 1980s Winner?
Google vs EC (monopoly + privacy concerns)
What is Product Development?
Product development refers to a strategy by which an organisation delivers modified or new products
to existing markets
EasyJet, EasyCar,
easyHotel, EasyMoney...
What is Market Development?
Market development refers to a strategy by which an organisation offers existing products
to new markets.
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Virgin case?
Conglomerate diversification?
Conglomerate diversification takes the organisation beyond both its existing markets and its existing products and radically increases the organisation’s scope
Virgin case?
Value-destroying diversification
Some drivers for diversification which may involve value destruction (negative synergies):
Responding to market decline
Spreading thin (risk) (may be destructive, but not necessarily)
N.B. Despite these being common justifications for diversifying, finance theory suggests these are misguided.
Managerial ambition
Value-destroying diversification
Some drivers for diversification which may involve value destruction (negative synergies):
Responding to market decline
Spreading thin (risk) (may be destructive, but not necessarily)
N.B. Despite these being common justifications for diversifying, finance theory suggests these are misguided.
Managerial ambition
Cautionary tale banking industry
Diversification does not decrease
systemic risk!
Synergetic drivers of diversification
• Exploiting economies of scope – by applying the
organisation’s existing resources or competences to new markets or services
• Stretching corporate management competences
• coaching & facilitating
• Increasing market power (can cross-subsidize)
From books to multi-media hardware to content & software to apparel…
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Different parenting roles
• portfolio manager – active investor in a way that shareholders in the stock market are either
too dispersed or too inexpert to be able to do
• What type of companies apply this parenting style?
Mostly private equity companies!
But also
• Jack Welch-style
– Ruthlessly prune businesses that are not winners
» GE shareholders first!
» From 411,000 employees (1980) to 299,000 (1985)
– Winning is everything
» E-clip
Portfolio managers Some of the richest investors in the world
• Richest person in the world (2009)?
– Warren Buffet
• Investor company? – Berkshire Hathaway
• Parenting strategy? – Avoid businesses with unclear profit margins and returns on capital
• No matter how exciting products may be
– Invest in sure bets
• in terms of shareholder return
– Delegate as much as possible of the managerial grunt work
• To business managers
20 |
Different parenting roles
• synergy manager – Is a corporate parent seeking to enhance value for business units by
managing synergies across business units
Case
• Founder works with all designer teams
– Same training across all business units/brands
– Zara, Stradivarius, Bershka, Pull and Bear...
Different parenting roles
• parental developer – seeks to employ its own central capabilities to add value to its businesses
Case
• What capabilities? – use of experienced start-up managers
– public relations and marketing skills
– “David versus Goliath” branding
• What industries? – “We move into areas where the customer has traditionally
received a poor deal, and where the competition is complacent.”
as parental developer
• Anti-establishment face of “acceptable capitalism” – Only hire friendly & fun people
– Never let a business go bust >< Jack Welch style
– Provide customers with transparency & “value for money”
against
• BA known in 1980s as…
“Bloody Awful”
• One BA handbook rule for flight attendants
“As you walk down the aisle, do not catch the eye of a passenger, otherwise they will just ask you for something”
– 23 |
Problem of parental attachment parent capabilities, wrong industry
• What business should Virgin not be in? • Virgin Cola
• Virgin Active (health clubs)
• Virgin Money
Against Coke & Pespi!
We take all competition seriously!
What key business is in trouble? Yet parental attachment…
• Accounts for more than half of Group revenues!
• Tip: embattled both by – Larger transatlantic players
– Domestic discounters
25 |
Parenting role and type of diversification
Unrelated (conglomerate) or related diversfication?
– Portfolio manager?
• Unrelated
– Synergy manager?
• Related
– Parental developer?
• Unrelated
26 |
Diversification and performance
True for both Western & Emerging Market firms?
Typical structure Western diversified business (M-form)
• Conglomerate discount! Proof of related or strong corporate capability
• Wholly owned subsidiaries
• No choice but to use/undergo corporate services
• Winners tend to get more attention
Typical structure Emerging Markets diversified business
• Related & unrelated businesses; minimum oversight corporate parent
• All individual businesses are separate companies (legal entities)
• Parent controlling stake; provides trusted brand & non-operational cap.
• Businesses can choose to use or not; brand and political clout Tata most used
• Live and let live in“ Large house : “Haveli”
• Some common property shared by all; some private property
• Strong help weak
Another option: outsourcing
Outsourcing is…
the process by which activities previously carried out internally are subcontracted to external suppliers
To integrate or outsource?
Value chain activity / Business…
a) Building block of distinctive strategic capability?
Yes: integrate
No: outsource
b) Prone to opportunism on the part of subcontractors? •Reduce standards
•Extract higher prices
–When there are few subcontractor alternatives
–When product/service is complex & changing (impossible to specify ex ante)
–When investments are needed in specialized assets
Yes: integrate
No: outsource
• Distinctive strategic capability? – “Instant fashion”
• From 1 year to 22 days lead design time
– E.g. Madonna tour in Spain
– Increase “buyer urgency”
• Only 50% in stores at start of a season
– >< 80 % rivals
• Few re-stocks
• Customers willing to pay premium price
– Cheap for mum
– Trendy for daughter
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Price +
Price -
Fashion - Fashion +
Pros & cns Vertical Int.
• >50% vertical integration: 20 % more expensive
– Higher costs!
» Logistics operations at northwest tip Spain
» Portugal & Morocco are nearby
• Production flexibility: 17-20% profit vs 8-13% competition
– Shortest lead times (2 weeks)
» React fast to consumer fads, do not forecast!
» Smaller batches / more styles, less quantities
• “Little advertising”: 0.3% total costs vs H&M’s 3%
– But best locations in top cities
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supported by unusual management style
• “Management as unusual”
• Informal, fast, flat decision-making
– Very down-to-earth, humble founder
» Never gave interview, top models?
» Own office used for visitors
– Power to small teams
» Not full automation!
» But very fast & flexible decision-making
– No-one rules (not even designers)
» Designers very autonomous
» Yet, only 15% designs go into production
» Versus 60% industry average
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Price +
Price -
Fashion - Fashion +
+ Horizontal
integration
Vertical and horizontal integration
Key competitors: total sales
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0
2000
4000
6000
8000
10000
12000
14000
16000
2003 2004 2005 2006 2007 2008
Inditex
GAP
H&M
Benetton
Portfolio matrix strategy
Growth/Share (BCG) Matrix
Parenting Matrix
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Models by which managers can determine what businesses in portfolio to
- invest in
- or divest
LOW
The BCG Growth-Share Matrix
HIGH
An
nu
al
real
rate
of
mark
et
gro
wth
(%
)
Relative market share
Earnings: high stable
Cash flow: high stable
Strategy: milk & invest Iittle ?
Earnings: low, unstable
Cash flow: drain on resources
Strategy: divest
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: low, unstable, growing
Cash flow: negative
Strategy: can business be grown into a
star, or will become a dog?
HIG
H
?
10
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2: digital camera
New CEO (2003)
1: film sales: US, Canada, & W. Europe
4: Kodak self- service kiosk
3: Kodak digital photo printer
Star to become
cash cow?
Question Mark to
New Star?
42
Result in 2012?
Patent litigation
Problems with BCG matrix
• Core capability becomes core rigidity across business units – From chemical film to digital
• Cannot separate one business unit (cash cow or dog) from another (star)
• Danger of self-fulfilling prophecy? – Motivation problems for cash cows…
• Exaggerated milking
– Become dogs even quicker
• Internal investment assumption? – Can get money from capital markets
• Don’t absolutely need to find internal cash cows
43
HEARTLAND
High potential
for adding value EDGE OF
HEARTLAND Value adding potential
needs to be specified
,
BALLAST
Typical old crown
jewel business:
Business better off
stand-alone
VALUE TRAP
Posesses some parental
competences and resources,
but not crucial ones!
ALIEN TERRITORY
Exit: only potential to
destroy value
LOW
HIGH
LOW HIGH
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Potential value
destruction through
misfit business unit
critical success factors
and parental
capabilities
Potential for parent to add value to business
Parenting Matrix: parenting added value!
Potential value destruction
High
Low
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Premium fragrances
Tea plantations
Animal feed
Ice Cream
Food
Home & Personal care products
Parenting Matrix
Frozen food
Low
Potential parental added value Scaling up mass-marketing & mass-distribution platforms
High
Parent adds R&D, but mass
vs premium marketing & distribution
BALLAST
ALIEN
VALUE TRAP